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Caput Mortuum, L.L.C. v. S&S Crown Services, Ltd.

366 N.J. Super. 323, 841 A.2d 430 (App. Div. 2004)

TAX SALES CERTIFICATES—A judgment lien holder is not a party entitled to redeem a tax sales certificate.

A judgment was obtained in Pennsylvania against an individual for more than one million dollars. The judgment was domesticated in New Jersey, where the debtor owned a residence. The judgment creditor tried to execute on the judgment, but was frustrated because there had been multiple fraudulent transfers of the property, which it successfully sued to have set aside. A lower court ordered that title to the property to be revested in the debtor’s name. A sheriff’s sale was scheduled, but was delayed because of litigation by the debtor’s wife. She asserted her spousal interest in the property and asserted that the debtor’s bankruptcy barred the sale. In the interim, a tax sale certificate was sold at a public sale. The certificate holder continued to pay taxes on the property. The judgment creditor neither bid on the certificate nor attempted to acquire the certificate.

Following the two-year waiting period required by N.J.S.A. 54:5-86, the certificate holder started an in personam tax foreclosure procedure to bar and foreclose all equity of redemption in the property. The judgment creditor did not dispute the holder’s entitlement to pursue its right to foreclose; instead, it claimed an entitlement to redeem the certificate either as an equitable owner or under the doctrine of equitable subrogation. The lower court denied that application and ordered summary judgment in favor of the certificate holder. Before an appeal was filed, the Bankruptcy Court granted relief from the automatic stay and the judgment creditor prevailed over the individual’s wife. Also before the appeal, and before the certificate holder completed its tax foreclosure action, the judgment creditor successfully executed on its judgment and received title to the property. As a result, the judgment creditor, now the owner of the property, acquired the undisputed right to redeem the tax sale certificate.

Even though the litigated matter was moot since the disputed issue had been resolved, the Appellate Court felt that the underlying issue was of such substantial importance that it should discuss and decide the case as if the issue was still alive.

Originally, in accordance with N.J.S.A 54:5-54, the holder of an outstanding tax lien certificate, a mortgagee, an occupant of land sold for municipal liens, and any “other person having an interest in land sold for municipal liens” could redeem a tax sale certificate. Before that statute was changed, a judgment creditor’s lien interest would have clearly qualified under the catchall designation, and the certificate holder’s ability to foreclose its tax sale certificate could have been interrupted by the judgment creditor’s right of redemption. However, in 1994, the Legislature deleted the phrase “other person having an interest in [land]” from the statute, replacing it with: “Except as hereinafter provided, the owner, his heirs, holder of any prior outstanding tax lien certificate, mortgagee, or occupant of land sold for municipal taxes, assessment for benefits ... or other municipal charges, may redeem it at any time until the right to redeem has been cut off in the manner in this chapter set forth, by paying to the collector ... the amount required for redemption as hereinafter set forth.”

This demonstrated a clear legislative intent to eliminate the rights of those persons who did not have a sufficient interest in the property to warrant extension of the right of redemption to them in favor of more protection for the owner of the property and the holder of the certificate.

After the amendment, the exclusive statutory right to redeem a tax sale certificate was limited to an enumerated group, which did not include judgment creditors. The Court found the Legislature determined that a judgment creditor had adequate other remedies, such as purchasing the land at its own judgment execution sale. The Court also held that the Legislature clearly restricted the statutory redemption right to those with a direct interest in the property. A direct interest includes that of owners, their heirs, and occupants of the property. The Court also included the holder of a prior tax sale certificate, since real estate taxes are only a lien on the land assessed and are not the personal obligation of the owner. Likewise, a mortgagee has a direct interest because it has a contractual security interest in the property but no claim against the person absent a note or other personal obligation. A judgment creditor, on the other hand, holds a personal judgment. That judgment may be satisfied in various ways, including by the payment of the debt out of any of the debtor’s realty through a forced sale. For that reason, the Court found it would be incorrect to include judgment creditors within the class of persons entitled to redeem a tax sale certificate.

The Court also found no public policy basis to extend the right of redemption to judgment creditors. The New Jersey Tax Sale Law was enacted to encourage the sale and foreclosure of tax lien certificates to assist municipalities in collecting revenue for delinquent real estate taxes and other municipal liens. Its provisions were expressly intended to be “liberally construed as remedial legislation to encourage the barring of the right of redemption by actions in the Superior Court to the end that marketable titles [to land] may thereby be secured.”

Consequently, to serve the objectives of this statute, the Legislature made municipal liens paramount to prior claims and set up a detailed procedure for the sale, redemption, and foreclosure of such liens. Municipalities sell tax certificates to generate funds owed by delinquent taxpayers, because “taxes are the lifeblood of government, the vital force needed to sustain the public interest.” The Court believed that it was in the public interest to encourage parties to purchase tax liens so that municipalities could collect their lost tax revenues.

The sale of a tax certificate is made in fee simple, subject to redemption at the lowest rate of interest bid at the sale. Although the property is “sold,” the certificate holder does not have title to the land. The certificate holder has three significant rights: a) the right to receive the sum paid for the certificate with interest at the redemption rate for which the property was sold, up to 18%; b) the right to redeem a subsequently issued tax sale certificate from any other holder; and c) the right to acquire title by foreclosing the equity of redemption of all outstanding interests, including that of the property owner.

The legislative goal was to transfer the burden of foreclosure from a municipality to private individuals. And, in order to encourage purchasers of tax sale certificates, thereby aiding municipalities in raising revenue, the Legislature also encouraged the foreclosure of these tax sale certificates. Thus, by reducing the ranks of those entitled to redeem, the 1994 amendment perpetuated the legislative policy of increasing the viability and efficiency of the foreclosure process.

Pursuant to the amended statute, the certificate holder had the statutory priority and authority to foreclose on its tax sale certificate. The judgment creditor was in a subordinate position with an inferior lien and without any statutory right to redeem the tax sale certificate. For that reason, it argued equitable subrogation. It asserted that it should be permitted to stand in the owner’s shoes and redeem the tax sale certificate because of the exhaustive actions it had taken and money it had spent to get the property back into its debtor’s name and then to execute on its judgment and a sheriff’s sale. The Appellate Division rejected the argument, holding that equitable subrogation is used to give a right to a party who has already expended the time and money necessary to protect its interest to secure its place. The judgment creditor, here, was seeking to use the doctrine to secure its place before expending the time and money necessary to protect its interest. Also, equitable subrogation can only be invoked to protect one with an existing ownership interest in the property – which the judgment creditor did not have. It only had a lien interest in the property.


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